Income Protection vs Mortgage Protection: Which Is Right for You?
If illness or injury stopped you working for six months, how would the bills get paid? Income protection and mortgage repayment cover both answer that question, but in different ways. Here's how they compare, and how to decide which suits you.
Income protection in a nutshell
Income protection pays you a monthly benefit if you can't work because of illness or injury. It's designed to replace a large share of your regular income, commonly up to around 75% depending on the insurer and policy type.
- The money can be used for anything: groceries, power, rent or mortgage, school costs
- Covers illness as well as injury
- Benefits are usually paid until you can return to work or the benefit period ends
Mortgage repayment cover in a nutshell
Mortgage repayment cover also pays a monthly benefit if you can't work due to illness or injury, but it's sized to your mortgage or rent payments rather than your full income.
- Keeps a roof over your head while you recover
- Claims are often simpler, because you may not need to prove your exact loss of income
- Typically cheaper than income protection, because it covers a smaller amount
Side by side
| Income protection | Mortgage repayment cover | |
|---|---|---|
| Monthly benefit based on | Your income | Your mortgage or rent payments |
| What it can be used for | Anything | Anything, but sized to housing costs |
| Proof of income at claim time | Often required (depends on policy type) | Usually simpler |
| Relative cost | Higher | Lower |
Key choices with both covers
Wait period
This is how long you must be off work before benefits start, often 4, 8, 13 or 26 weeks. A longer wait period lowers your premium. Think about how long your savings and sick leave would last.
Benefit period
This is how long the benefit can be paid for each claim, for example 2 years, 5 years, or up to age 65. Longer periods give more protection against long-term illness.
Agreed value vs indemnity
With income protection, an "agreed value" policy fixes your benefit at the time you apply. An "indemnity" policy works out your benefit at claim time based on your recent earnings. This matters a lot if your income varies, for example if you're self-employed.
Self-employed? Income protection can be especially valuable if you don't have sick leave. Choosing the right policy type is important, so get advice before you apply.
So which one is right for me?
- Choose income protection if your household relies on your income for much more than the mortgage, or you want the most complete protection.
- Choose mortgage repayment cover if your main worry is keeping your home, your budget is tight, or income protection is hard to get for your occupation.
- Combine both if you want your housing costs secured and extra income support on top. Some people take mortgage cover with a short wait period and income protection with a longer one.
Don't forget ACC
ACC can help if you're injured in an accident, but it doesn't cover time off for illness, which is a much more common reason for long absences from work. We explain the gaps in our article on ACC vs income protection.
Every situation is different. If you'd like help weighing up the options, we'll compare policies for you and explain the trade-offs in plain English.
Want a second opinion on your cover? Book a free, no-obligation chat with AFA Insurance. We compare policies from a range of New Zealand insurers and explain your options in plain English. Call 021 985 218 or book online.
This article is general information only and is not personalised financial advice. It doesn't take into account your objectives, financial situation or needs. Policy features, definitions and limits vary between insurers and change over time, so always read the policy wording and talk to an adviser before making a decision. Financial advice is provided by AFA Insurance advisers under the licence of Certainty Financial Advisers Network Limited (FSP677951).